economy Markets

Maybe We Need To Worry About COVID Inflation After All…

Sticker shock at the grocery store? Or too many "meat shortage" headlines?

Perhaps we’ll need to worry about COVID-19’s inflationary side sooner than we thought.

Or at least that’s a superficial, headline-friendly take on the inflation expectations component of the preliminary University of Michigan sentiment survey released on Friday.

The one-year index rose markedly from 2.1% to 3%, while the longer-term gauge (five to 10 years) moved up as well.

A simple read is that surging prices at the grocery store and the psychological effect of front page headlines about prospective meat shortages tied to the closure of processing facilities, are having an impact.

“Perhaps the most surprising finding concerned consumers’ inflation expectations”, the survey’s chief economist Richard Curtin remarked. “The median expected inflation rate during the year ahead rose sharply, with wide differences across age and income subgroups”.

You’re reminded that although the latest read on CPI showed core prices falling the most MoM in history, prices for groceries rose the most in 46 years.

Despite Donald Trump’s efforts to relieve “bottlenecks” in the supply chain by executive decree, beef prices continued to surge in the wake of his executive order mandating meatpacking facilities remain open during the pandemic.

On Wednesday, reports indicated Tyson will cut prices for some beef products by as much as 30% following the price spike. Ground beef prices had tripled since early March, and the USDA is investigating fat margins at meatpackers for evidence that companies are taking advantage of lower prices for inputs (i.e., cattle) and higher prices to consumers.

Remember, inflation has a self-fulfilling component to it. Expectations have a way of becoming reality, although one certainly imagines that dynamic will be blunted in the near- to medium-term by the simple fact that tens of millions of people are jobless and hence unable to pull forward consumption by virtue of being broke.

And yet, as detailed extensively in “‘There’s No Experience On Which To Base Our Forecasts’: After The Virus, Hyperinflation Or Deflationary Spiral?“, there are multiple channels through which the crisis could stoke inflation down the road. Some consumers are apparently anticipating just that.

As for the rest of the University of Michigan survey, it beat estimates and the current conditions index actually rose, which is odd considering current conditions are objectively bad. Expectations, on the other hand, fell.

“Confidence inched upward in early May as the CARES relief checks improved consumers’ finances and widespread price discounting boosted their buying attitudes”, Curtin went on to say Friday. “Despite these gains, personal financial prospects for the year ahead continued to weaken, falling to the lowest level in almost six years, with declines especially sharp among upper income households”.

Pity the rich, apparently. They didn’t get a $1,200 check from Steve Mnuchin.


5 comments on “Maybe We Need To Worry About COVID Inflation After All…

  1. calh0025 says:

    Yeah, instability is going to drive inflation. Prices cannot stay low with unpredictable supply chains. Companies are going to start pricing in demand gaps and supply shortages meaning everything will need to have bigger margins all the time. If it doesn’t we’ll see stockouts that last months and months on more and more products. Meat, Milk, Eggs and further down the line even processed foods could take a bigger toll if plants become heavily infected. Executive orders on power generation equipment will most certainly affect costs as low cost suppliers like China are forbidden. Gas may stay low but it may also start to rise as refineries need to pay fixed costs even with oil low and gas consumption low.

  2. Ria says:

    Food prices are up, but most prices are falling. Think autos, housing, commercial rents, residential rents, energy products, auto insurance and most important of all average wages. So many consumers are feeling it at the grocery store, but the changes out there amount to relative prices. Other prices could rise down the road of course- but right now and in the near future inflation is not the issue. Disinflation or outright deflation is a worry for now.

    • I agree. That monopoly meat companies would exploit the opportunity to profiteer in a regulatory absent environment should come as a suprise to no on. The real problem is one of people with money to spend or for others willingness to spend.

    • payshunt says:

      Agree with Ria. I expect inflation growth, but that means that I expect people will have a paycheck. Getting a bit concerned about that. I also recognize that the coincident numbers we see are already old by two weeks

      Like the idea of UBI, but also concerned about the permanent effects of UBI. Who will never search for a job if they are paid to simply live?

  3. joesailboat says:

    Back in early March I needed a new microwave and called an appliance chain. He did not have any. He also told me that they ran out of every freezer at all their locations. The hoarders will eventually start emptying their freezers when they hear all their favorites are back on the shelf. Food is in your face when you think prices, it is a sentiment survey.

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